The Financial Accounting Standards Board has issued a new accounting standards update for stock compensation.

ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” was issued as a consensus of FASB’s Emerging Issues Task Force.

In the update, FASB noted that entities commonly issue share-based payment awards that require a specific performance target be achieved in order for employees to become eligible to vest in the awards. Such performance targets could be when a company attains a specified profitability metric, for example, or sells shares in an initial public offering.

“Generally, an award with a performance target also requires an employee to render service until the performance target is achieved,” said the document. “In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.”

Currently U.S. GAAP does not contain explicit guidance on how to account for such share-based payments. Many businesses account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award, FASB noted. Other reporting entities treat those performance targets as non-vesting conditions that affect the grant-date fair value of the award. The new standards update aims to resolve the differing accounting treatment of those awards in practice.

The amendments apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That’s the case when employees are eligible to retire or otherwise terminate their employment before the end of the period in which a performance target (such as an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.

The amendments are effective for both public and private companies for annual and interim periods beginning after Dec. 15, 2015. Earlier adoption is permitted.

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